Use a Freedom Account to Prepare for the Unexpected

My wife has always maintained a sizable savings account, but having extra cash is new to me. Until recently, I had always lived paycheck-to-paycheck, often treading close to a zero dollar balance in my checkbook for months at a time. Now, though, I’ve not only established an emergency account, but set up a couple of targeted accounts as well. (One is for vacations, and the other is for a new car.)

My method works for me, but others have different approaches. In her book Debt-Proof Living, author Mary Hunt suggests a sort of “emergency fund plus“. Often when people struggle with money, she says, it’s not the predictable monthly bills that are the problem. People cannot cope with the unexpected things — not just emergencies (like a severe illness), but irregular expenses like auto maintenance, wedding and birthday gifts, or a new pair of shoes.

To deal with all of life’s surprises, Hunt recommends a Freedom Account. Here’s how it works:

Determine your irregular, unexpected, and intermittent expenses. Because the past provides a good indication of the future, look at your records for the past year or two. Make a list of your expenses that don’t occur on a monthly basis. Divide them into broad categories and calculate our approximate monthly spending on each.

Open a second checking account. Most of the tactics we discuss at Get Rich Slowly involve multiple savings accounts. Hunt advocates opening a second checking account to act as a Freedom Account. She further warns that “under no circumstances should you accept overdraft protection, ATM privileges, or a debit card for your Freedom Account”. This account is not for daily use.

Authorize an automatic deposit. When you open your Freedom Account, instruct the bank to schedule an automatic deposit from an existing account based on the average monthly total of your irregular expenses. Pick a day of the month that works based on your cash flow. For me it’s best to have automatic transactions occur soon after I get paid.

Start a logbook. “As far as the bank is concerned, you have a second checking account,” Hunt writes. “But you are going to treat your new Freedom Account as a collection of sub-accounts.” To do this, take the list of irregular expenses you created earlier and start a page for each category. For example, you might have pages for clothing, vacation, property taxes, and auto maintenance. Each month when the automatic deposit is made into your Freedom Account, you will divide that among the sub-accounts in your logbook. For example, if you transfer $200/month to your Freedom Account, you might manually add $25 to vacation, $25 to clothing, $100 to property taxes, and $50 to auto maintenance.

Make a deposit every month. “This is going to feel weird in the beginning,” Hunt says. She’s right. It felt strange to me when I began to keep sub-accounts at my credit union, but now it’s second nature. I like having my money divided based on its intended use. With your Freedom Account, you’ll be transferring from your primary checking account to a secondary checking account on a specific date each month. Then you’ll further divide your money by hand in your logbook. It sounds like a lot of work, but it’s really not.

Hunt notes that Freedom Accounts can be a great marital aid. By giving each partner a Freedom Account, both spouses can have their own pool of money to budget independently.

This sounds like a viable alternative to a standard emergency fund. I don’t plan to implement a Freedom Account for myself — I like my current system — but it’s something I would have considered during the three years I was working to pay off my debt.

Addendum: Several readers have noted that Hunt’s method is a little outdated. A modern way to do this would be to open an account at ING Direct. Because ING Direct allows you to create multiple accounts at no cost, you can have one for each of category.

Dave, I think Hunt is trying to limit the Freedom Account to checks only. She wants users to only use this account for situations in which checks would be appropriate. For those struggling to get a handle on spending, this is a good idea.

I was actually getting ready to release part two of my article on an emergency fund this week which discusses saving strategies. Personally, i keep my emergency fund in a secondary savings account that doesn’t allow me access via an ATM or Debit card. I have to make a phone call in order to transfer money into Savings or Checking. In essence, this helps me from myself for any of those impulse purchasing situations. I think if I were to put my money in a checking account It would be far too easy for me to justify spending it on a non emergency.

My first experience with any type of emergency fund was this “Freedom Account” as described by Hunt. I set one up in an interest bearing checking account that allowed an unlimited number of checks to be written, but limited ATM access, etc. It worked well for us during the first couple years of establishing emergency savings, and I have since moved on to “subaccounts” at ING.

I think this is a good idea – I sort of do something similar. I happen to use a savings account, but that’s because I put the expenses on my cashback credit card and then reimburse, I don’t have any consumer debt so this works for me.

Multiple accounts, averaging irregular expenses and automagical payments are the way of the future. They are the only things that keep me afloat – laziness, disorganisation and procrastination are a terrible curse.

Good concept. Wouldn’t work out for me, though… It took me a while to get out of a mess I made with ONE checking account, I can’t even begin to imagine what my situation would have been back then with TWO :)

This is exactly what my wife and I are getting set up, except we’re using a high interest E-Savings account with Royal Bank. That way any money we pump into there for taxes, etc. are building interest until the bill is due.

We then would transfer the balance to the Checking account for payment. That way we don’t have any access to it other than an intentional transfer.

I have used this system of sub-accounts as both a single and (now) married person, and I find it always works well. Like all good money management tools, it keeps a person grounded in reality, i.e. what money do we really have for each purpose?
The other thing that keeps my household on track financially is knowing that spending more does not lead to more happiness. (The happiest people actually report more and better relationships with others than the average person.) More on beating the consumption game at my blog Diamond-Cut Life http://alison97215.wordpress.com.

??? I don’t understand the point of putting savings for all these different purposes in a single checking account. If it’s so that you can write a check when necessary, why not use a Vanguard money market or short-term investment grade corporate bond fund? You can write checks on either one of those, but they’re making a little money for you instead of lying fallow at a bank. Because they’re mutual funds, you think twice about diddling the money away, but because you can write a check, the money is easily accessible when you need it.

I use VG’s Prime Money Market fund for savings I may have to use over the next year–money set aside for tax on freelance earnings, for example. The other fund holds money to buy the next car; I buy cars about once every ten years. Keeping cash earmarked to be forked over to the government separate from other funds guarantees that I won’t carelessly spend it before April 15.

If your bank doesn’t charge per account, make things easy on yourself and just open a different account for each purpose. My wife and I have 11 (!) different accounts (My checking, her checking, dining out, her clothes, my computer, gifts, contingency, emergency, utilities, vacation, condo).

Seems extreme at first glance. It certainly gets strange looks from the bank tellers! But BoA doesn’t change per account as long as you have over a certain amount combined between the accounts, or if you use direct deposit to each. So they can go fly a kite ;)

I had to read this column three times before I understood the concept. Basically it sounds like a complicated way to apply the 60% budget solution. (For those who are unfamiliar with the concept hereâ€™s a link to one of your earlier posts – ).

My husband and I use a couple targeted accounts for large expenses like a new car fund and college savings so we can make our money work harder for us. Even our emergency fund is in an interest bearing account. We track everything through MS Money on both a monthly and annual basis. Through annual tracking, irregular expenses like wedding gifts which typically blow the monthly budget make more sense on an annual basis. It works for us but for those who are looking for more flexible savings techniques, a freedom fund or 60% budget might be the answer. I just canâ€™t imagine opening up a checking account for things like a new pair of shoes. I canâ€™t even remember the last time I wrote an actual check.

Ok, I do not understand why you would have the money just “sitting there” in a checking account, earning almost no interest. I think a smarter option would be to open an online high-yield savings account with checkwriting privileges.

I read Hunt’s book about a year ago, and felt that the ‘freedom account’ plus separate logbook would be clunky—and that I probably wouldn’t keep the logbook updated. Like other commenters, I like the idea of using my ING subaccounts for these types of expenditures. I’ve been using a zero-based budget approach (a la Dave Ramsey) and I can see putting my meager ‘fun money’ budget into an ING subaccount.

Carrie wrote: I had to read this column three times before I understood the concept.

Ouch! Not what a writer wants to hear. :)

Rob M. wrote: I do not understand why you would have the money just â€œsitting thereâ€ in a checking account, earning almost no interest. I think a smarter option would be to open an online high-yield savings account with checkwriting privileges.

This is absolutely a great option. Hunt’s book is several years old, and not written with the internet generation in mind. I think that taking her basic system and adapting it to a modern lifestyle is an excellent way to go.

I pretty much do this, but I use a savings account myself. I call it “Short Term Savings” and note the subdivisions in a simple spreadsheet. It really has helped me keep my other savings quite steady, where in the past it was erratic.

I never had debt problems, but this kind of system works well for a control freak like myself. :)

I never broke out my savings into individual categories or figured my infrequent expenses to the individual expense. At first, we kept getting killed by infrequent or unexpected bills. Eventually I looked at the available data (90 days when we started) and estimated how much would be needed to cover the unexpected. After a year or so, we were pretty dead on. This went into my checking account, and built up until that expense hit.

This worked for us, but we could trust ourselves with a checking account. Also, our checking account paid pretty good interest at the time and the few pennies a month difference it cost me over a savings account was not worth the hassle.

We did use a savings account, but this was for our emergency fund and to save for the major purchases. Again, we could trust ourselves to keep things straight.

I think everyone needs to look at themselves. Be honest, can you trust yourself with a checking account or with having your “funds” intermingling? If not, do what it takes to separate things. Then you need to attack the source. Why are you irresponsible? Why can’t you trust yourself? Envelopes (or segregated accounts) are a great learning tool, but as a long term solution they address the symptom not the source of the problem.

I’ve been reading your blog for sometime now. Maybe I’ve missed it, but I’ve never seen anything addressing the difficulties facing those of us who are self-employed. It is almost impossible to budget (much less set money aside) when you never know from month to month what your income will be. Just when you think there’s a cushion, you lose a client, or a project ends, and all that dutiful savings goes toward paying the mortgage or just getting the essentials paid.

We used this idea when my husband was in grad school and now we’re continuing it. I don’t have a separate checking account – I know I can be responsible and not pinch the money. I keep a spreadsheet in excel with my current balance, so I know how much is alloted for this.

We have used it for lots of different things, though, not just vacation. We use it for life insurance, car insurance, car repair, car replacement, etc. Anything that we need to make a big payment for every 3, 6, or 12 months we make a payment into this account. This way when we need something like our brakes fixed on the car we’ve already been setting aside the money for just such an occasion.

I like it, because it is above and beyond our regular savings. We also contribute to an emergency fund, a savings fund, an investment fund, and we fund our retirement accounts. But, this helps me not see that money as extra and keeps things liquid for me in our ING account.

I have been using a Freedom Account for years now, after I read one of Mary Hunt’s books I started it. It was the key to getting control of our finances. We never seemed to have enough money and stuff always seemed to come up. Since we started our Freedom account we have had very few emergencies, because we try to cover everything in the Freedom account.

For instance we have a section for car repair, home repair, vacation, kids activities, HOA dues, pet expenses (stuff other than dog food), membership fees, car insurance, school expenses and beach account (I am saving my change for a beach vacation). I have a notebook that I keep everything in and it works out great.

The only time we have used the emergency fund in the past few years was when the transmission replacement was more than what we had in our car repair account. It has truly been a lifesaver for us! Or should I say budget saver? Pretty much everything that comes up will fit in one of our categories. (we do the cash envelopes for clothing, gifts, and medical stuff, but this could be covered in the freedom account.) I love this system!

We do something similar. Some things are going to happen – medical expenses, car repair needs – that aren’t easy to plan for. I try to set aside a little each paycheck for these so that if/when something happens, we’ve got some money to cover it.

I am also using this idea to save for Christmas and other gift-giving occasions. I don’t get a Christmas bonus (gov’t employee) but by saving a little over the year, we have funds for these occasions when they arise.

I agree, especially #5 Make a Deposit Every Month. Although it is hard for most, it is a necessity if you want to avoid being strapped for cash when hardships arrive. Living below your means is the best way to achieve this. Stop trying to keep up with the Jones’ and make sure you are saving money after you pay all of your bills every month.

Mary Hunt is one of my favorite pf authors! My twist on her freedom account is dubbed ‘summer account’. I work for a school district and so I really only work 9 months out of the year. What I do is take a specific portion of each of my checks through the school year and put that into the summer account to cover wages I won’t be making while off, quarterly and semi-annnual bills, and fun money for the summer. I kept track of the irregular bills for a year and that gave me a good idea as to how much I need to save and then I ballpark the fun money amount. This has worked out great and last year I had close to $1000.- left over after the summer ended!! Needless to say… the left over amount went into the emergency fund. :)

I’ve always employed some form of savings for irregular expenses, but I just started doing it in a different way. I actually closed the account I used to use for exclusively for those expenses and simply sub-divide my main chequing account in my Google spreadsheet. This means I’m only paying fees on one account instead of two. Also, because the actual amount in the account is much greater than what I consider “available”, those savings can act as overdraft protection, which helps with cash flow. I’m about to cancel the Overdraft Protection I’ve got on that account now, and will be saving another $4/month in fees as a result. I think the savings in these fees makes up for the loss in interest from having that money in a higher-yield account.

Hmm. If I understand this correctly, she is basically advocating a virtual envelope system? I’m not sure I understand why one needs a second checking account for irregular expenses. I keep it all in our checking and savings accounts (one of each).
We use GnuCash as our accounting software — this basically functions as the “logbook”, as Hunt puts it, but I don’t have to do the math, or set up Excel equations.
GnuCash (it’s free! — http://www.gnucash.org) is the only accounting software I’m aware of that allows you to divide an account (e.g., your checking account) into sub-accounts, as many, and as deep as you want — no separate logbook required. So, in the bank’s eyes, I have one checking and one savings account, but in gnuCash, those accounts are clearly divided into things like Emergency Fund Savings, General Savings, Rent/Utilities, Car Insurance/Registration, etc. With each paycheck, I make virtual disbursements in gnuCash to those sub-accounts, without having to move actual money around, except for scheduling the checking -> savings account transfers.
The main drawback is that I do have to keep good records of transactions, because finding a missing transaction can be a little difficult sometimes when trying to balance the checkbook. Also, if you’re not accustomed to double-entry accounting, GnuCash takes a little getting used to.

The virtual sub-accounts are *the* reason I use GnuCash for our household finances. Otherwise, an Excel logbook makes sense.

I think the idea is that you have a separate account for this stuff so that it doesn’t get mixed up with any of your emergency fund, your regular expenses, or your goal-based savings.

If you’re good at money management already, then you probably don’t need it. But if you’re not, physically separating out money for different purposes means that it’s much more likely to be used appropriately.

My wife and I put everything into our high-yield online savings account. Then we have a Google Docs spreadsheet where all the deposits/withdrawals are noted and on another sheet we have all the funds allocated (or “earmarked”) so that we know what’s what. I find it works really well and you can take advantage of earning a nice bit of interest having it all together.

I was going to post pretty much the same thing as Sean in number 26. I use YNAB and every month I budget for things like insurance payments, car repairs etc. Money goes in to those catagories every month and then when the bill comes there is enough in that catagory to pay the bill. No need to open and manage a separate account. It is all just managed in the same program I use to manage all my expenses. Couldn’t be easier or more straight forward.

Please keep in mind that it is for beginners, people who are still struggling to get their first foot forward. And, as JD stated, the book is older, so adapting it to an ING acount that has built in sub-accounts/earns intrest would be a smart move.

I follow the Dave Ramsey method and would sort of agree with this. Everyone needs a “blow money” account, but this account NEEDS A BUDGET. Without a budget people will be buying things because “I deserve it” or “I had a rough day, FREEDOM TIME!”. I suggest everyone learn about budgeting and being a millionaire later in life. A good place to start would be learning about Dave Ramsey and his method at http://www.daveramseyforums.com

I set up an ING money market checking account for just this purpose. It generates about 2.5% interest and no fees, which is perfect for this type of account. It’s linked to my ING savings and my regular checking account. I highly recommend this solution.

In this post and others, I’ve seen many refer to Subaccounts in ING… can someone explain how to do this? I have an ING account but I’m missing something ’cause I don’t see how to set these up… help me take my blinders off…PLEASE :-(

My wife and I have been using a Freedom Account for about a year now. It works for us where a more detailed and formalized budget does not. We only have to budget for the items we want, and only have to worry about it once a month. We save for known large expenses (insurance, taxes, vacation) and for future expenses which will eventually occur (our next car, a new roof). Knowing that money is set aside for these expenses provides peace of mind.

The Freedom Account is not an emergency fund. We keep an emergency fund of 3 months expenses in case of job loss or other unhandled major expenses.

This is a great post. It will truly help those currently struggling to get by each month by reducing current expenses when they can and saving for those known, upcoming expenses.

As a side note, I see a lot of posts for YNAB. Looks like the YNAB team is actively at work making a number of posts on your blog when they aren’t editing wikipedia.

My wife and I tried YNAB and found it was not worth the money or the input effort. YNAB will not easily enable you to change your personal finance behavior. People need to plan and then track their expenses. There are a number of free resources out there to do so, including some cited in your blog. The envelope method works well too.

I came to the comments page to say the same as Jennifer above about GnuCash. I use it for both myself and for my small business. Double-entry accounting does take a bit of getting used to, but it makes it simple to look and see where your money is going.

I actually have a savings account at E*TRADE that I use for this purpose, with subaccounts in GnuCash to track various kinds of irregular expenses. When the time comes to balance the “checkbook”, the software knows to collect all of the transactions in the subaccounts and to balance them against the final statement balance.

If you use Quicken, and don’t want to open an extra checking account, you can create Savings Goals (as many as you like) to act as your Freedom Fund. The amount shows as being “spent” in the register but won’t screw up your balance when you reconcile the account. You can even set up scheduled transactions to “deposit” money your in savings goals regularly. I did this when I didn’t have a savings account and liked being able to set aside money without having to physically transfer it somewhere else. I use Quicken 99, but hopefully this is a feature that has been preserved throughout the latter versions. Before I kept my freedom fund separate from my regular funds, I would overestimate how much money I had to spend for the month. I would forget that part of that balance was my freedom fund and that money was already spent, I just hadn’t received the bill yet.

Nowadays, I use a second checking account for my freedom fund. I could use an online savings account instead and earn a smidge of interest, but I prefer to move my money around as little as possible. And I doubt I’d remember to transfer the money back to checking when I really need it. Even though I’ve budgeted pretty well for my irregular expenses, sometimes it catches me off guard how fast they come around.

This is similiar to what Dave Ramsey recommends with his emergency fund. I use an on-line, high-yield (4.0% APY) savings account that links (for free) to my checking account. I keep all my “targeted” savings in this one account and simply keep the money categorized on the same excel spreadsheet I keep my monthly budget on. The categories I use are listed below. Basically any type of savings that should not be needed for at least 6 months:

I simply make one transfer per month that includes all these categories added together. I have caps on these accounts, like the “Expensive Car Repairs” category is capped at $1,000. There is nothing like having $1,000 dollars sitting in an ear-marked “Car Repairs” fund when the head gasket blows!!

Basically, to set up what we refer to as a *sub account* in ING you log onto your existing account and use the *Open an Account* tab to establish a new savings account. You can then give the new savings account a nickname, which will then be your *sub account.* You might also explore setting up an Electric Orange checking account. Personally, I think it’s the best thing since sliced bread and pays a fair interest rate (when the Fed’s not lowering them :( )

The Freedom Account method sounds a little too cumbersome for my needs. I like the ING *sub accounts* and several different on-line accounts to subdivide my money. The Freedom Account seems too easy to commingle money slated for different things, whereas physical separation makes it easier to track and monitor those funds.

This is precisely what we do with out regular budget. We take annual insurance and divide by 26 pay periods and put the right amount in each time. We take our total utility bills for the year, divide by 26 and put that amount in each time. This works fabulously for us, but you have to be very disciplined to let the money sit.

For a while, we were earning pretty good interest on our checking account, so we left it all in the checking account, but now that it’s .05%, we’re putting more of the money that’s just sitting into a high yield savings account.

We used to use a ledger book to keep track of the subaccounts, but now we just use an excel file. It makes it much easier to track the deposits and withdrawals and be able to check that the balance is correct.

Separate accounts for irregular expenses give me tremendous peace of mind and keeps me honest in my accounting. Money earmarked for other purposes always seemed to evaporate in our joint checking account or money just sitting there drove me crazy thinking it could be earning more interest somewhere else. As I work my way through the basics(budget, $1000 cushion, pay down debt, 3 month emergency fund, funding retirement, other goals), it’s clear that I need to set an even bigger chunk of change aside to save for irregular expenses than I originally imagined/ planned. Plus rising food and fuel prices have added another complicated layer to saving enough.

This comment is for everyone with animals — please remember both routine and unexpected veterinary expenses when you’re planning. Just like people, it’s the emergency visit or the suddenly sick animal that will often be the greatest financial challenge. Older pets also tend to develop more medical problems as they age.

(And if you’re thinking of getting a dog, please be aware that some popular breeds are prone to problems that aren’t cheap to fix or treat. If you’re aware of what problems your dog’s breed is likely to get, you won’t be so unprepared financially if it happens.)

I’m not getting why it needs to be a checking account. If the money is sitting in there pooling up and you are tracking the subcategories manually there’s not really a difference between checking/savings.

I use a modified version of Freedom Accounts in my personal finance (Mary Hunt’s Debt-Proof Living was the first PF book I ever read).

I basically just deposit the money into savings, notate it on a sheet of paper (I have an Excel spreadsheet backup, but I like using paper for things like this, I seem more apt to keep up with it than on the computer). Anyway, I just transfer the money back to checking whenever an expense comes up. If I don’t have enough money in checking to “float” the expense, I will make the transfer before the purchase.

I started an automatic savings plan with ING about a year ago. I am pleasantly surprised at the amount I have been able to save and look forward to saving more. I am also a small business owner, so multiple checking accounts for me is almost second nature. I highly recommend both a savings account and a freedom checking account. Thank you! This is a great post.

I have the subaccount system with ING and I highly recommend it. You can have the amount of your choice direct deposited into the ING account and then divide the money according to your choice in the different sub-accounts. There are no fees. You can only get it out with a 2 day transfer and it pays a good interest rate. Everyone should try it!

I like this approach and use it on a limited basis for larger expenses such as vacation and property taxes. At one time I used ING Direct and they are great. However, I really like MINT and ING seems to be anti-aggregator. So I keep the targeted funds with the emerg fund and track the sub-accounts with a spreadsheet.

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My name is J.D. Roth. I started Get Rich Slowly in 2006 to document my personal journey as I dug out of debt. Then I shared while I learned to save and invest. Twelve years later, I've managed to reach early retirement! I'm here to help you master your money — and your life. No scams. No gimmicks. Just smart money advice to help you get rich slowly. Read more.

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